Eric's Delivery (updated x 2)

Mr Eric Sprott likes to talk about how long it took him to get the first lot of silver for PSLV. Three months he said, which supposedly tells you how tight the physical market really is. His delivery is top notch – after all he’s a successful fund manager. But let’s take a closer look at his actual silver delivery. What I hope to demonstrate here is that rather than being sensational, his story is actually quite boring.

So as a second part of our series to encourage us all to question more closely the claims of those who promote silver as an investment, we turn to one of the most oft-repeated silver memes on the net: “Sprott had trouble sourcing silver because of how long it took to get his physical delivered”. And before anyone accuses me of being anti-silver, please read my recent ‘Silver Bulls’ post [link] where I basically speculate that the price of silver is about to smash all records. What I really want to do is question the dogma where people lap up the story (including me) and interpret it as being indicative of a tight physical silver market.

Taking delivery of that much material is not the same as taking a delivery from Pizza Hut. Anyone who has taken delivery of a monster box (which you guys have in America) has would have an idea of how heavy physical silver can be. Anyway, shipping that much weight is a logistical challenge, so let’s explore. But let’s ignore insurance paperwork and shipping ports, customs, etc., since I still don’t know where Sprott bought his silver from, although it stands to reason that some of it must have come from overseas. I DO have knowledge about the weight limits for a shipping container, and it’s really easy information to find if you want to check for yourself [search].

A 20-foot shipping container can hold approximately 20 tonnes maximum. This is both a structural limitation as well as a road-transport maximum (the road tonnage limit varies from country to country). A 40-foot container is double the size but similar restrictions apply – i.e. not necessarily double the weight – my research shows one 30-tonne limit for a 40-foot container.

Using our average, if Sprott had to get his stuff to the Royal Canadian Mint for storage – he would have needed approximately 31 shipping containers to do it. Here is the visualization (using 20-foot containers) of what that looks like, and my digital people have loaded the first one onto the truck already, thirty to go!

Then there’s the forklifting involved. In my research I found a picture of the vault of the ZKB Silver ETF, which shows an example of silver stacking which should make us all envious. This isn’t an article about ZKB, I just wanted to show a photo of what silver bars typically look like when they are stacked on a pallet (e.g. for transport).

Let’s say we have 1 tonne per pallet in rough figures, that means that Eric’s delivery required lifting and shifting approximately 632 of these babies – and requires pack and unpack. Here is another visualization of what that looks like (click for large version). The bulk of these are stacked 5 pallets high (each stack weighs 5 tonnes), except for the row at the end (32). Please note this is a visualization only - it is not likely that the silver was ever in a big pile until it was all stacked inside the vault (still on pallets inside?)

And the same view, different angle (click for larger versions of image)

From the above picture, it's pretty clear that this is one heck of a lot of silver to shift. No really – think about it … even if the refinery were just across the road from the Royal Canadian Mint, it would still be a huge job just based on the forklifting effort. Then add shipping times, road haulage, different suppliers, customs clearance, security, whatever else. Stepping back and looking at the practicalities of getting 632 tonnes of silver from multiple sources to Canada, the only thing I now find surprising about the fact that it took Sprott three months to get his silver is that he was able to do so quickly!

So even disregarding the stories of still-warm-metal-bars … if there are any experienced logistics managers out there, please let me know your opinion of whether taking 12 weeks to ship and pack these is about right or way off. Please anyone let me know if my mathematics is wrong, I'll happily adjust the figures or (and publicly amend my statements) if I’m proven wrong with my calculations.

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Updated 17th August 2011 - thanks for all the opinion and feedback from everyone. I received a comment from Bron Suchecki by email, am adding the content to the bottom of this post because the blogger comments system seems to be malfunctioning at the minute. Bron introduces a rather excellent twist to the plot - the possibility that Sprott himself got diddled by whomever he bought the silver from - and to that extent Eric fully believes the 'shortage' association by virtue of his PSLV purchase experiences:

Bron said .."Having trouble posting this comment to your post, could you put it up for me:

Precious metal vaults are not like distribution warehouses with space for 20 trucks to load up a one time. Most would have one dock or two.

And yes it isn't just unload, thanks mate, see you later. You are checking off each bar against the supplier's bar list.

So even if the metal was across the road it would take some time.

As to the purchase, I think what Victor and Kid guess is probably how it was done. You would certainly buy in smaller lots over a few days so no one in the market knows you are a large buyer. My guess is he bought it loco USA, not London.

However, it did not need to be done as forwards. Each lot could have been done as spot unallocated and on t+2 requesting immediate conversion to allocated (held in London). Then you take 3 months to get it shipped from London to Canada. This means you have no counterparty risk as it is off balance sheet allocated and all at the cost of about 3 cents per ounce for shipment.

Contrast to the forwards, where if the counterparty fails, you now have price exposure. Yes you still have your cash, but have issued shares at a price based on the forward deals which you now have to scramble to buy at current spot prices. If Sprott did forwards, then as Victor says he was backing PSLV with "paper" temporarily and exposing PSLV holders to counterparty exposure to bullion banks.

There are a few possible reasons why it was done this way:

1. Kid's reasons - it allows Sprott to talk about the 3 months delivery time and let the bugs misinterpret that.

2. He relied on his bullion bank counterparts to structure the deal and got played. They would have recommended forwards as they can make more margin on the forward points and it takes pressure off their physical books as they just sub contract with refineries to deliver over 3 months ex-US as and when the refinery has the physical.

The best thing Sprott could do for the silver bugs would be to open a London metals account with a bullion bank. Buy silver in lots from different counterparties, with settlement to his London account. When all done call up the bullion bank and ask for a 600t allocation - shouldn't be a problem as SLV has done numbers like that on a number of days. That way he finds out if the daily huge movements in SLV are real. My guess is he'll never do it this way because they will deliver it. Then he has no story to tell.

Alternatively, Sprott's organisation is just not that cluey on the PM markets and just take their banker's advice. With the size Sprott is dealing in, he could just contact refineries directly and cut the bankers out. Better still, just do a deal with a miner to buy the next 600t of their output. Thinking creatively there are many ways to structure this and minimise or eliminate exposure to banks."

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Updated 29th April 2012 - Over at the Chris Martenson blog there has been some great discussion about the bullion markets, with contributions from Eric Townsend, Bron Suchecki, Victor the Cleaner and Jeff Christian. It's quality stuff and worth a read (just the comments section) in it's entirety. However relevant to my own research, I spotted this quote from Jeff, which basically vidicates Bron's theory in the paragraph above. For the comment itself, one must take Mr Christian at his word but it's so beautiful it made my eyes water. This is just one paragraph of a larger comment about silver:

"... Regarding Sprott: They got hosed. We spoke with Sprott people about their delivery problems, as well as with bankers. They handled it dreadfully, and did not require the banks to behave in standard market operating procedures. Why, we don’t know, but they did everything wrong the way many rank amateurs do. Sprott is an eminent salesman, however: He turned lemons to lemonade, saying not that he was an amateur in buying all that silver, over-paid, and was messed over in delivery. Instead, he said it was because there was a problem getting the physical silver. There was no problem with the silver; he just did not negotiate and handle the bank properly. No surprise there to anyone who has watched his funds over the years. ..."

My comments on this are: (1) Bron's interpretation appears to be correct :). (2) Sprott, however resourceful and clever, still presented a deceitful story about what occurred. If this were about a delayed BRIE delivery then I suppose it's fine but it's not - common people are searching for ways to protect their wealth from financial armageddon and many good people have been hoodwinked by Sprotts story. Perhaps at the time they bought an overpriced PSLV which later had its premium collapse. A transfer of wealth from your pocket to someone else's courtesy of hype and spin. Or as Kid Dynamite would say, 'sold to you, Sucka'.

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Addition 30th April 2012 - Kid Dynamite in the comments section added a good point, which is worth highlighting in the main article body.

"Warren - I just want to re-emphasize the point that Sprott's counterparty: ie, whomever was responsible for delivering PSLV's silver to PSLV - did NOT default on their side of the trade. this is important, as an uncareful reading of JC's explanation could conclude "just as we thought - the banks didn't give him what they owed him" which is false... "

And just remember, the primary issue is here is not whether Sprott is a great marketer (he is) or whether buying silver is good (it can be), or any kind of character judgment (irrelevant). My focus is purely that the story about the delivery taking a long time because of silver shortages, as popularly portrayed during the initial PSLV offering, is false. And consequently, whether newbie investors were influenced into a particular investment because of a false portrayal. And that it's okay to explore the human element of being duped and feeling poorly about it. Bear in mind that the PSLV 'delayed delivery' story was one of the underpinning 'shortage of silver' proofs.

Be sure to read the rest of the Martenson comments thread, which is still ongoing.

20 comments:

Postscript: Readers will (and should) question my motives for writing this piece ... it's quite simple. I'm PISSED OFF. I bought silver based on the shortage stories, and after looking at my own pictures I realise I invested based on the wrong information. I want to know if anyone else reads this and feels sheepish or angry like I did – after all the meme is one of those sacred cows but it also goes a lot deeper than this too – namely that if Mr Sprott's only difficulty was the logistics of the purchase, then the much-vaunted physical silver shortage is grossly overstated.

The rub here is that Eric has ALWAYS BEEN TELLING THE ABSOLUTE TRUTH, and as far as I know he has never DIRECTLY stated the reason for the long delivery time was (directly) due to a shortage of silver. Clever, because like any good story telling, it becomes more real if the listener comes to that conclusion themselves. Wynter Benton said it best – "men believe what they want to believe".We encourage people to ask hard questions of what they read and hear, and to ask themselves 'is this story really indicative of the true state of things? What are the motives of the teller?'

Two things: great article with well thought out logic. Second, I have been invested with Sprott for about a decade. He has always come across in conference calls as honest and trustworthy. Those are of course MY opinions, and perhaps what I want to believe.

I guess I could never store 600 tons of silver in my safe deposit box!

Yes, I hope I make it clear that I'm not attacking Sprott OR the fund itself - I'm angry at myself for lapping up the inference about the tight physical silver market.

For all I know, Sprott may have had 20 forklifts working double shifts and working weekends - and I would be happy to know that, but so far it's been absent from the story. Perhaps if this article gets his attention then he might be able to comment and fill us in.

I'm not pissed. It is what it is. The only question is could he have done it with 31 trucks or was it necessary to do them one at a time because because of logistics on the receiving end. I guess this is what I was trying to ascertain from Bron way back. What does the receiving docks look like on all these bullion storage places.

@Louis, agreed (re: the question about the receiving docks at the mint) - in all probability, mint warehouse people are probably super experts at silver fork lifting and they could handle that load with their eyes closed. I guess at the mint end they only have to shift around 10 tonnes a day (equivalent of two stacks in my picture), but don't forget that the silver would not have been in one big neat stack like in my picture.

I'm not going to say I am correct - hopefully the message is clear that equating long delivery time being equal to 'shortage' is what I'm no longer convinced about. I feel the story about Eric's delivery is incomplete and now I want the rest of the details.

Don't be angry. You should be proud. Yours is the first post I've EVER read that actually tries to piece together the details and facts of something that the 'Frotholytes' push as one of their key 'facts' of a tight market when I have yet to have anyone who can't get the silver or gold they want.

As someone who has had some experience moving large heavy items let me just tell you that as RLP eludes to, it's not the actual lifting and shipping that takes a lot of time - it's the coordination between all the parties (ie. project management) and all the damn paperwork. I'll promise you that this was under work for a lot longer than three months on the back end in planning and preparation. You just don't wake up one morning and say, "In three months I want 632 tonnes of silver." The three months was probably the actual operation itself and I don't see any reason why it couldn't be accomplished in that time.

Screwtape Files is posting hard hitting informative posts that focus on facts and reason. You guys are really kicking ass. Keep it up.

kudos, Warren. Bron can enlighten you on some more details of the logistics of shipping bullion, I think.

I have a few more tidbits on this story, which I think I've mentioned to you previously...

1) 1/4 of the silver came from "in house" - Sprott's own funds - which is why they now own PSLV (the PSLV that they are selling at a huge premium to buy back other silver exposure)

2) "Taking delivery of that much material is not the same as taking a delivery from Pizza Hut" - well - location is a huge part of that, and that's another reason why Sprott had to keep his silver in Canada. If he kept it in London, with the vast majority of the other silver in the world, he would have been able to get it very very quickly (and thus, no fancy misleading stories about how long it took). This is also why the SLV/GLD are custodied in London, and why they have subcustodians: so that they never need to load up the shipping containers or receive the shipping containers for creations and redemptions: the metal just gets shoved across the hall.

ps - one more very important point: when Sprott talks about how long it took him to get his silver, he implies that there was some sort of problem. So I asked his IR department if there was a default on the terms of the contract by the party who was delivering the silver. THE ANSWER WAS NO. repeat: the silver was delivered as per the terms of the contract, which Sprott arranged, of course...

Excellent work, Warren. I think it's now fairly obvious from your research that "three months" should in no way be considered extraordinary.

I just checked surface shipping times from London to Canada. It's 4 - 6 weeks.

Let's put it another way. I want to start a new ETF based on bricks. Imagine that there's no shortage of bricks in London, but sadly Canada currently doesn't have any. If I said that it therefore took me three months to buy, organise the logistics, arrange shipping, forklift (three times, remember), surface ship, road haul, etc., etc., etc., my 632 tonnes of bricks, would anyone raise an eyebrow?

Furthermore, would anyone then really draw the conclusion that the world is short of bricks?

I think about it this way. Worldwide supply (mining and recycling) is about 100 tonnes per trading day. If you want to purchase more than 600 tonnes and if you don't know a private seller of 600 tonnes in advance ('block trade'), you better not try to buy all that silver on a single day in the spot market. If you did, you would sharply run up the price and after that the price would collapse again.

Therefore Sprott purchased a good portion of his silver through forward contracts (from bullion banks?) and spread it out over 10+ weeks. No surprise here.

So for the first two months, about 1/3 of PSLV actually consisted of paper silver.

In fact, I think you're wrong about the spreading out of the purchases - all of the silver purchase prices are locked in at the time they sell shares to the public. Maybe you meant that he spread out the delivery over 10 weeks?

This is the same with secondary offerings of PHYS, CEF, etc. When they say "the proceeds will be used to purchase gold/silver bullion" - the price has already been locked in - the contracts have been purchased already.

[ The mechanics of shifting bullion around has gotten some attention. One other article doing the rounds at the minute is some reflection on the logistics of the Chavez delivery link. Interesting work and makes you realize just how convenient it is to leave the metal in the vault and just change the ownership record (it's a lot cheaper, can be done faster and carries less risk). ]

Been thinking about the why Chavez wants the physical and a few things occur to me. 1. He is telling the world he has the Gold and he has the oil. If there are any coups then the blame should be placed at the door of the bankers and the USA. It's insurance on many levels.

2. When he finally gets the gold he will pull a Sprott and tell the world it took for ever to get so therefore there is a shortage and the BOE etc don't have as much as they say they do.

3. He is going to use some of this gold to fund this http://en.wikipedia.org/wiki/Bank_of_the_South with hard assets. He and the other organizers of this bank want the IMF out of the neighborhood.

Regardless of the company he keeps and his rhetoric he has done many good things for his country and other countries including the USA.

Warren - I just want to re-emphasize the point that Sprott's counterparty: ie, whomever was responsible for delivering PSLV's silver to PSLV - did NOT default on their side of the trade. this is important, as an uncareful reading of JC's explanation could conclude "just as we thought - the banks didn't give him what they owed him" which is false...

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